Basic 1031 Exchange Facts: LLC-owned property

Relinquished Property: Undeveloped land on highway

Sold for $11,000,000

Tax Basis $8,000,000

Replacement Property: Business Park

Bought for: $11,500,000

Tax Savings: $430,000

Background of 1031 Exchange by LLC

John Doe, a real estate investor, owns highway-frontage commercial property on the Interstate 35 corridor between Austin and San Antonio, Texas. He holds this property through his business, JD Investments, LLC, which would complete the 1031 exchange. John originally bought the property for $8,000,000 for cash. Like many investors, John wanted to grow his investment by moving his capital into more profitable commercial real estate. He realized selling his property would trigger a significant tax penalty, so he consulted his CPA. The CPA told him about a 1031 exchange, which could help defer capital gains taxes.

Benefits of 1031 Exchange for LLC

Section 1031 of the IRS tax code allows investors to defer federal capital gains taxes if they reinvest the proceeds from a sale into another qualifying property. Any tax-paying entity can use a 1031 exchange, but the taxpayer must remain the same throughout the process. Since JD Investments, LLC held the original investment, John had to sell the property and buy the replacement in that same LLC name for the 1031 exchange to be done successfully.

John wanted to cover all his capital gains and understood he needed to buy a replacement property of equal or greater value. Since he had no mortgage on the original property, this was easier to achieve. By using a 1031 exchange, John could defer paying capital gains tax on the sale. This allowed him to use the gains as equity toward his next purchase.

LLC 1031 Exchange Specifics

Instead of paying over $430,000 in capital gains tax, John worked with WealthBuilder 1031 as his qualified intermediary. He, through his LLC, sold his property for $11,000,000, and thanks to the 1031 exchange, he could reinvest the full amount, including the tax savings, into his next property.

WealthBuilder 1031 explained the strict IRS deadlines. John had 45 days to identify his replacement properties and 180 days to close on them. Both deadlines began on the date his relinquished property sold. After reviewing market options, John identified three higher-yielding commercial properties and made an offer.

1031 Exchange for LLC Completed

John successfully purchased a new commercial business park for $11,000,000, using all the equity from his sale. Thanks to the 1031 exchange, he deferred the capital gains taxes and reinvested the full amount into another property. This strategy allowed John to achieve his goal of deferring federal capital gains taxes and building more wealth through higher-yielding commercial real estate.